Grantor Trusts

The six triggers

• §676 — power to revoke. The grantor or a nonadverse party can revoke, terminate, alter, amend or appoint. Every revocable living trust. Purely managerial powers as trustee do not count (Lowenstein); the power to appoint a protector who can terminate and hand back corpus does (Pulitzer); a commission-earning broker or a later-acquired spouse with power to change beneficiaries is a nonadverse party.
• §677 — income for the grantor or spouse. Income may, without an adverse party’s consent, be distributed to or accumulated for the grantor or spouse, or used to pay premiums on insurance on either life. The existence of the power controls, not its use. A funded ILIT is a grantor trust to the extent of premiums on policies in force (Iversen, 3 T.C. 756); the public page’s “nothing to report” is true only of an unfunded ILIT. Income actually used to support a dependent the grantor must support is the grantor’s (§677(b)); the mere possibility is not unless the grantor as an individual controls it. The chance of getting property back by intestacy or an elective share is ignored (Reg. §1.677(a)-1(c)).
• §673 — reversion worth more than 5% at inception, valued with maximum discretion in the grantor’s favor under §7520. Exception for a reversion on the death of a minor lineal descendant before 21. With current §7520 rates almost any full reversion fails the 5% test. Pre-March 2, 1986 ten-year “Clifford” trusts are grandfathered.
• §674 — power over beneficial enjoyment without an adverse party: to change beneficiaries, shift income, amend the dispositive terms (Gurich). The test is mechanical — de facto control through compliant trustees is not a power (Goodwyn). Exceptions: sprinkle powers held by independent trustees (no more than half related or subordinate; the grantor cannot be a trustee), §674(c); powers of any trustee other than the grantor or spouse limited by an ascertainable standard — health, education, support — §674(d). These two exceptions are why a well-drafted irrevocable trust with a corporate trustee is not a grantor trust.
• §675 — administrative powers: dealing with the trust for less than full consideration; borrowing without adequate interest or security; an actual loan to the grantor or spouse not repaid before the start of the year (course Example 10.7 — the trustee son’s emergency check to his mother made the whole trust hers for the year); and the general powers of administration — voting control, investment control over closely held stock, and the power to substitute assets of equivalent value (§675(4)(C)), the standard IDGT trigger because it does not cause estate inclusion (Rev. Rul. 2008-22).
• §678 — someone other than the grantor with a power exercisable solely by himself to take income or corpus: a trustee who can distribute to himself; a beneficiary with a withdrawal right. §678(b): if the grantor is taxed under §§671–677, the grantor wins. §678(c): a trustee’s power to use income for a dependent he must support taxes him only to the extent used. §678(d): the holder can disclaim within a reasonable time after learning of the power. Lapsed five-and-five and Crummey powers make the holder owner of a growing fraction of the trust (Rev. Rul. 67-241; PLR 200022035): a $50,000 lapse over a $1,000,000 trust makes the holder owner of 5% of the trust and its income, including capital gains. The IRS treats a Crummey holder as owner; the position is contested.

Consequences

• The grantor reports every item of income, deduction and credit as if the trust did not exist, on the forms an individual uses (Schedules B, D, E; Forms 4952, 8960). A 100% grantor trust owes no income tax, AMT or NIIT itself.
• No gain or loss on sales, rent or loans between the grantor and the trust (Rev. Rul. 85-13). The grantor’s §121 ownership and use include the trust’s (Reg. §1.121-1(c)(3)(i)); the two-year periods do not restart on transfer. No other trust gets §121: a house in a bypass trust that the surviving spouse lives in is sold with no exclusion (course Example 10.15; exam Q50).
• The IDGT: the grantor pays income tax on assets he has given away and cannot reach; the payment is not a gift to the beneficiaries (Rev. Rul. 2004-64); the trust grows untaxed; the estate shrinks by the tax paid. A sale of appreciated property to the IDGT for a note is not a taxable sale. The cost is the tax, not a benefit.
• A trust wholly owned by one U.S. individual is an eligible S corporation shareholder (§1361(c)(2)(A)(i)); a partly-grantor trust is not. See Business Income and S Stock.

The three reporting methods

• Standard method (Reg. §1.671-4(a)): file a Form 1041 with only the entity information completed and the grantor-trust box checked, and attach a statement listing the owner’s name, TIN and address and every item of income, deduction and credit in 1040 detail. The statement goes to the grantor by April 15 (not extended); keep a copy three years; §§6721/6722 penalties apply. A partly-grantor trust reports the non-grantor portion on the 1041 lines and the grantor portion on the statement.
• Grantor-TIN method (one owner): the trustee gives every payer the grantor’s SSN on a W-9; if the trustee is someone other than the grantor, he forwards the 1099s; nothing is filed with the IRS. This is the revocable living trust everyone has.
• Trust-TIN (1099) method (one or more owners): the trust has its own EIN, receives the 1099s, and issues 1099s as payer to each grantor for that grantor’s share, with a Form 1096 and a statement. Required where two grantors are not filing jointly (unmarried co-grantors).
• Switching: from the standard method to an optional method, file a final 1041 stating “Pursuant to §1.671-4(g), this is the final Form 1041 for this grantor trust”; from the 1099 method, mark the prior year’s 1096 final. Not eligible for the optional methods: common trust funds, foreign trusts, QSSTs, a single-grantor trust with a fiscal year, a non-U.S. grantor, a grantor who is an exempt recipient for 1099 purposes.
• At the grantor’s death the grantor trust ends. The trust needs its own EIN if it was running on the SSN, a Form 1041 for the period after death, and a decision on the §645 election — next page.

Study questions 26–30

• SQ 26. Someone other than the transferor can be the owner (§678); the rules were written to stop income-splitting through controlled trusts; a transfer to a grantor trust can be a completed gift; grantor status is usually deliberate.
• SQ 27. Wholly the grantor’s under §676 if a nonadverse party can revest title in him; merely serving as trustee is not enough.
• SQ 28. A retained unilateral power to change beneficiaries is §674 ownership whether or not exercised and even if it must be exercised in the beneficiaries’ interest.
• SQ 29. A five-and-five lapse over a $500,000 trust makes the holder owner of $25,000 of trust assets and their income — not $25,000 of income — and is not a gift (§2514(e)).
• SQ 30. The IDGT grows untaxed, shifts wealth without a gift, and shrinks the estate; the grantor’s bearing the tax is the cost.

Private reference, not client advice. Notes taken from two continuing-education courses: Form 1041: A Practical Guide (Hadges & Zollars, Thomson Reuters Checkpoint Learning, 10 hours, written on 2019 law) and Taxation of Trusts, Estates, and Decedents (DeScherer & Rodda, CeriFi, 2025 printing on 2024 law). Figures and rules brought current to 2026 in October 2026 (P.L. 119-21, Rev. Proc. 2025-32, T.D. 9918). Items tagged check are to be confirmed against primary sources before they are relied on.